Broker compensation disclosures: Are you ready?
For benefits brokers still struggling to understand what needs to be reported, to whom and when, here’s a quick rundown.
In recent years, a growing contingent of benefits brokers and consultants have been advocating for greater transparency into how they get paid. And the federal government has agreed with them, including a provision in the Consolidated Appropriations Act of 2021 requiring that brokers begin disclosing compensation and commissions to their employer clients.
As if brokers didn’t already have enough on their plates this fall, the requirement goes into effect in just over a month, on December 27, 2021. And if the Q&A section of a recent BenefitMall webinar is any indication, there are still a lot of questions that need to be answered. Misty Baker and David Mordo did their best to clear up as much as possible, with the caveat that the official guidance for implementation has yet to be released.
“Remember that we’re all still waiting for regulations to be finalized,” Mordo said, assuring webinar attendees that the process needn’t be overly complicated. Notably, both Baker and Mordo stressed throughout the webinar, brokers are disclosing these numbers to their clients, not a federal agency, and, as of yet, there’s no actual penalty for non-compliance.
“As long as you make a good-faith attempt to disclose this, not only the dollar amount but the description of the services–governmental agencies want to make sure that the compensation you are receiving is reasonable for the services you are providing,” Mordo said. “That’s the basis of this regulation.”
So, for brokers still struggling to understand what needs to be reported, to whom, and when, here’s a quick rundown:
Direct and indirect compensation
The rule requires brokers to report any indirect or direct compensation or commission valued at more than $1,000 that they expect to receive throughout the year.
Direct compensation, said Mordo, should be “any money collected directly from the employer group or the cover plan. Period. Don’t read anything else into that.”
Just ask, where is the money coming from? “When an employer writes a check out of their pocket and gives it to the agent or consultant, that is direct compensation,” Baker said.
Things that wouldn’t be included would be things like shopping around for quotes. “Maybe you talk about a claim,” Baker said. “They’re part of your agency best practices. You don’t have to disclose anything. But when you sell a medical plan and are getting a percentage or PPM, those things need to be disclosed.”
Indirect compensation can be a little more nuanced. “Basically, it’s everything else that you receive from any source other than the covered plan,” Mordo said. “It could include commissions, payment received from a covered service provider or subcontractor, compensation related to plan services that you are performing; it could be referral fees from a PBM, a wellness vendor, a TPA that might be doing some administrative services, an HRIS platform. All of those are different sources other than the covered plan.”
Simply, who is writing you the check? If it’s a vendor or service provider who has gotten the employer’s business because of you, then it’s indirect compensation. Baker and Mordo predict that brokers can expect to see more itemized sources of indirect compensation than direct.
Also, don’t forget that it’s only compensation of more than $1,000 that needs to be reported. If the compensation from a dental or vision plan is less than that, for example, it doesn’t need to be disclosed.
As another example, Baker noted: “Sometimes we do commission sharing, splits. We might get a finder’s fee. That also needs to be disclosed. If we each earn 50%, we disclose 50% each.”
Oh, and don’t forget the possibility of non-monetary compensation. For this, the reporting threshold is anything valued in excess of $250. “Four tickets to a concert, for example,” Mordo said. “Things like a golf outing, expensive dinner, tickets to a show. Anything in excess of $250 will have to be disclosed.”
And when?
The regulation isn’t requiring brokers to send out commission disclosure statements to all of their clients on December 27, but as part of a renewal or new contract process.
“Any business that you renew after Dec. 27 must be disclosed,” Baker explained, “This means that if you have a contract for your 1/1 renewals that has already been signed, you do not need to disclose compensation.
“The disclosure must be given separately and in advance of the group selling altogether,” Baker added. “Sometimes you may not have any idea that compensation may be coming, a bonus, or a flat fee. But you disclose upfront what you can reasonably expect.”
And if something comes up during the plan year that you hadn’t expected? Let the client know, said Baker. “Maybe you thought you were receiving three percent and it was four. If you made an error due to omissions or mistake, that must be corrected within 30 days of discovery.”
There’s also the possibility that a plan fiduciary will request a compensation disclosure statement at some point during the plan year. Maybe the company has hired a new CFO or new CHRO who wants to review their benefits contracts–those requests must be met within 90 days.
Most importantly, how?
Baker and Mordo walked attendees through a template BenefitMall has created to help brokers put together a disclosure statement, based on their interpretation of the rules thus far. Mordo also noted that the regulation is a continuation of a 2012 disclosure regulation for financial advisors.
“This is nothing more than an amendment to that section that now includes health and welfare plans,” he said. “The whole genesis of this was transparency not only for financial advisors but not brokers, consultants and agents.”
A few key points of the template:
- Are you a fiduciary? “In your capacity, if your agency makes the decision to play the role as a fiduciary, you’ll have to disclose additional compensations,” Mordo noted. While most brokers do not act in a fiduciary role, any time you are managing and distributing plan assets on a clients’ behalf, you are. This could include things like distributing MLR rebates, handling COBRA premium collections and distributions, or managing HRA reimbursements.
- How much information is required? While there’s no firm guidance as of yet, Baker and Mordo expect that the required reporting details will not be overly onerous. Simply listing a flat fee, percentage or PEPM, as well a brief description of the service provided, should suffice.
- Signatures: not required, but a good idea.”This is a pretty vague point of the law,” Mordo said. “You don’t have to have a signature from your client acknowledging that they received this form. We view this signature line as a broker protection. It’s the employer that bears the burden of proving to the dept of labor that they did not get the disclosure.”
But what about…
There are a lot of aspects of broker compensation that aren’t quite as cut-and-dry as the examples Baker and Mordo provided. And while the audience had plenty of questions, they admitted that, without official guidance yet, they don’t have the answers.
For example, what about a bonus or incentive earned after selling a certain level of business, but not necessarily based on one particular employer? “It is unclear who we have to disclose to,” Mordo said. “The one covered plan that you sold or renewed to put you over your goal, or do you have to disclose to your entire book for the year that helped you reach that goal?”
Benefits brokers should keep their eyes peeled for specific guidance in the coming weeks, as well as doing as much as they can to prepare now based on the available information. Much like other recent transparency regulations, the federal government seems to be standing firm on its deadlines for this one.
“NAHU was very much hoping for a delay to allow our broker partners time to accumulate their documents and understand the letter of the law,” Baker noted. “It doesn’t look like this is going to be delayed.”
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